We recently published a list of 10 Best Big-Name Stocks to Buy Right Now According to Short Sellers. In this article, we are going to take a look at where Bank of America Corporation (NYSE:BAC) stands against the other big name stocks.
In early April 2024, Goldman Sachs Inc.’s data revealed that short selling on individual US-listed stocks was at the highest level in 6 months, and the most targeted sectors were technology, telecom, and media. This increase in short positions was seen after the significant ~9% advance seen in 1Q 2024 for the S&P 500. As per the data, some hedge funds that were using long-short equity strategies have started to fight the rally.
During extreme market volatility, short selling has become pronounced and has drawn significant interest from institutional and retail investors. It has prompted regulatory intervention as new reporting requirements have been issued by the SEC to offer transparency and ensure the availability of short position data.
Recent Trends in Short Selling
In the 2Q 2024, the US and Canadian markets saw an increase of ~$58 billion in short interest or a rise of 5.1% from the previous quarter.
Recently, S3 Partners, a renowned tracker of short-interest data, reported that the sectors that saw the largest increases in short exposure in 2Q 2024 included information technology (a rise of $49.3 billion), communication services (at $11.2 billion), and utilities (a rise of $3.7 billion) from the previous quarter. The sectors that saw the largest decrease in short exposure were the energy and financial sectors, down $12.3 billion and $1.6 billion, respectively.
Earlier in 2024, a significant surge in the leading AI giant resulted in losses of ~$3 billion for the short sellers. Some market experts even described this as an “AI-generated nightmare.”
In global equities, short interest climbed during July 2024, with strong increases seen throughout the Automobile (+13bps), REITs (+11bps), and Consumer Durables (+11bps) sectors, reported S&P Global. On the other hand, the largest decreases were in the Financial Services (-10bps) and Real Estate Management and Development (-4bps) sectors.
Talking about the US equities, the average short interest decreased to 77 basis points during July 2024. Significant increases in short interest were seen throughout REITs (+6 basis points) and the Household and Personal Products (+8 basis points) sectors. Conversely, the largest declines were in the Financial Services (-15 basis points) and the Automobile (-9 basis points) sectors.
Heavily Shorted Stocks Might Not Always Be in Distress, Says S3 Partners
S3 Partners revealed that there is a relatively weak correlation between short positions in certain assets and distress measures. This means that not all heavily shorted stocks are facing difficulties. As per the firm, broader market sentiments and valuation concerns are some of the factors that can drive short interest.
The company believes that shorting an asset can form part of broader strategies or hedging activities not linked to distress. It mentioned that there can be 3 measures of bearishness for stocks —- average analyst ratings (From 1 to 5), Credit default swap (CDS) spreads, and Altman Z-Score.
For example, the US Dollar had a low short position of ~1.32%. However, it had a high CDS spread of 1000 basis points. This indicates high perceived distress on the currency even though there is minimal short interest. This can be because of factors such as currency market dynamics or investor sentiments.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 92
Short % of Shares Outstanding (August 15, 2024): 0.81%
Bank of America Corporation (NYSE:BAC) operates as a financial holding company. It offers saving accounts, deposits, mortgage and construction loans, cash and wealth management, certificates of deposit, investment funds, online banking services, and other related services.
Bank of America Corporation (NYSE:BAC) is expected to see strong earnings and revenue growth over the coming years mainly due to the switching costs it has created and the advantages that come from lower customer acquisition costs. On the consumer side, the banking company can cross-sell multiple products, offering advantageous pricing to key customer segments. It can also spread its overall costs of customer acquisition across revenue streams.
Also, the company enjoys a broad reach. This means that Bank of America Corporation (NYSE:BAC)’s scalability enables it to acquire deposits cheaply which are sticky. In 2Q 2024, the company was able to add ~278,000 net new consumer checking accounts in the Consumer Banking business. This was the 22nd consecutive quarter of growth. Its CET1 ratio came in at 11.9% (Standardized), which was 122 bps above the new regulatory minimum.
In 2Q 2024, its revenues, net of interest expense, came in at $25.4 billion, reflecting an increase of $180 million, or 1%. This was mainly because of higher asset management and investment banking fees. Bank of America Corporation (NYSE:BAC) continues to focus on organic growth via strategic investments in its core businesses.
Analysts at Barclays increased their price target on the shares of Bank of America Corporation (NYSE:BAC) from $43.00 to $49.00, giving it an “Overweight” rating on 17th July. As of Q2 2024, 92 hedge fund holders had stakes in the company.
ClearBridge Investments, an investment management company, released its first quarter 2024 investor letter. Here is what the fund said:
“We added several new positions during the quarter. Our largest new addition was Bank of America Corporation (NYSE:BAC), one of the world’s leading financial institutions, serving some 66 million consumer and small business clients across the U.S. as well as large corporations, financial institutions and governments globally. We believe that the interest rate pressure that Bank of America faced in early 2023 has subsided, and risks surrounding deposit outflows have abated, which should allow the company to improve its book value and capital growth as well as benefit from a rebound of capital markets activity.”
Overall BAC ranks 4th on our list of the best big name stocks to buy according to short sellers. While we acknowledge the potential of BAC as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than BAC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.